The way it should be

Harshad Mehta stock market scandal

Posted by VASUDEVA REDDY on Sunday, January 2, 2011 Under: modern facts

Before going to know what exactly the scandal is first one need to understand the government policies and economic situations at that time. That was the period of liberalization, the economists and the politicians were fighting on the liberalization issue. In the early 1990’s every bank in India had to maintain particular amount of their deposits in government bonds.  This ratio was called statutory liquid ratio (SLR). It can be calculated as total demand/total liability x100. The objectives of SLR are

a.       To restrict the expansion of bank credit

b.      To augment the investment of the banks in Government securities

c.       To ensure solvency of banks. A reduction of SLR rates looks eminent to support the credit growth in India

Each bank had to submit the detailed sheet of its balance at the end of the day and also had to show the amount invested in government bonds, sufficient amount to meet the ratio.  After government decided that the banks need not show their details on each day, instead they need to show by the end of the week i.e, Friday. In addition to that there was an extra clause stated that the average percentage of bond holdings needed to be greater than that of SLR by the end of the week but there was no restriction on everyday holdings. That meant the banks could sell their bonds in the early days of a week, and they can bought back by the end of the week. By the end of the week many banks were in desperate need of buying the bonds. This is where the broker came into the picture. The broker knew which bank has the shortage, called less, of bonds and which bank has the surplus, called plus, of bonds. Then the broker acts as a middleman between the banks to transfer the bonds. HARSHAD MEHTA is one of such broker.

He told to the bankers who were ready to sell the bonds to give the cheque on his name instead of the bank that needs the bonds. He told to bankers that he was dealing with the many banks so that he could not say to which bank he was going to sell the bonds. Since he was a trusted broker, bankers agreed.  For example, consider the two banks X and Y. Bank X, which needs the bonds by the end of the week, and the bank Y is ready to sell the surplus bonds. Harsha Mehta is one who took the bonds from the bank Y and sold to the bank X. since he was dealing with many banks at a time, he could keep some capital with him always. For example he takes money from Y on Wednesday and he promised to pay the money to the bank X on Thursday. Since he was dealing with many banks he had very good amount of money at every point of time. He got the capital required to play with stock markets through the banks. With the capital he got he had been buying the stocks heavily. The shares that attracted the Harshad the most were the Associated cement company(ACC).  With his investments the price per share of ACC went to 9000 from 200 within a short span of time. Since he needed to book the profits in the end, he sold the shares. It was the same day the market crashed.

On 23rd April 1992, journalist Sucheta Dalal in a column in Times of India, exposed the dubious ways of Harshad Mehta. The authors explain: “The crucial mechanism through which the scam was effected was the ready forward (RF) deal. The RF is in essence a secured short-term (typically 15-day) loan from one bank to another. Crudely put, the bank lends against government securities just as a pawnbroker lends against jeweler. The borrowing bank actually sells the securities to the lending bank and buys them back at the end of the period of the loan, typically at a slightly higher price”, the same phenomena stated above. Later the scheme was exposed the banks wanted their money back, causing the collapse.

Harshad Mehta later was charged with 72 criminal offences and more than 600 civil action suits filed against him. He was convicted in only one of many cases filed against him by the time of his death. He died in early hours of 1st January 1992. Still there is a mystery on the death of Harshad Mehta. Doctors said that he died because of severe hear attack.

 

In : modern facts 


Tags: harshad mehta scandal stock market 
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